Selex adds blended funds to smooth savings growth

Blended funds have become a popular way to provide members with bespoke, easy-to-communicate investment strategies that allow schemes to move underlying investments without having to explain each change. But experts have warned against potentially higher investment charges in these set-ups.

The changes – which will affect 600 Selex members that have additional voluntary contributions, and a few hundred defined benefit members with a DC top-up element to their savings – bring the scheme into line with its sister FuturePlanner scheme, which has had the funds for around a year

“We are giving them the kind of skillset that has also been deployed for the [DB] scheme,” said Mike Nixon, head of pensions at defence company Finmeccanica, the ultimate sponsor for both plans. “[It] does engage members more; if the money is more than it was the year before, you tend to believe the process is working.”

The blended funds (see box on page six), which are provided by P-Solve, the scheme’s DB fiduciary manager, aim to provide a similar delegated approach for DC members. The manager adjusts the components of the funds between different asset allocations and underlying investment managers to beat the markets.

The funds have specific inflation-plus targets but are also reviewed against the market. “They have exceeded across all of those measures. [But] it has been quite a good year for growth assets,” Nixon added.

The Selex scheme has also changed its lifestyle strategy to switch progressively between the blended funds, and remain invested in global equities until eight years before retirement, to give members a smoother savings journey. “They may even put more money in,” said Nixon.

Keeping costs down

Consultants have welcomed these kinds of strategies as long as member costs are not inflated. “From a governance point of view it is easier to communicate, so the trustees can make a change to the blended fund without having to communicate that they have changed a component part,” said Brian McCauley, senior investment consultant at Buck Global Investment Advisors

“They can talk about the concept rather than going into the nitty-gritty mechanics of who the underlying manager might be.”

Inflation-plus targets could make it easier for the member to plan what he or she will end up with at the end of their savings journey. “Then the question is just how much do I want to put in to get the replacement income in retirement,” he said.

But such a strategy could cost more than a basic lifestyle strategy. “If you are trying to get what you believe to be [a] best-of-breed manager for each stage of it, then you may be paying a little bit more for that,” added McCauley.

“Blended funds can be a good thing if they allow ‘plug and play’ of underlying fund changes to be effected quickly and cheaply,” said Andy Cheseldine, partner at consultancy LCP.

“A common problem in DC is delayed implementation of investment changes [and] less common, but still an issue, is higher costs of transitions than could be achieved if they were better planned,” he added.

Research by provider Hargreaves Lansdown has demonstrated some of the volatility in traditional lifestyle strategies – particularly in the decumulation phase where funds are primarily made up of bond and cash – and are heavily exposed to the risk of rising yields.

At this end, lifestyle funds have fallen in value by 5 per cent since the beginning of May due to rising gilt yields, said a report it released today. The strategy worked “tremendously well” in the wake of the financial crisis and throughout quantitative easing, the report stated. But as the potential end of QE draws closer fortunes have changed.

“If and when yields start to rise, lifestyle fund investors are likely to suffer as a result,” the report states. “As an illustration, if yields were to rise quickly to pre-financial crisis levels, it would not be unreasonable to expect a 25 per cent fall in the value of a typical lifestyle fund.”

Additional reporting by Lisa Botter